There will always be subprime loan credit

To keep people safe from real gangsters, it's best to keep loan credit like payday loans legal. Image from Wikimedia Commons.

Loan credit that is considered subprime is something that will always exist. The mortgage crisis over the last few years brought the term “subprime” into the national lexicon, and it applies to borrowing money from a loan lender without the credit scores that a top notch, or prime, lender would lend to. Bad credit loans come in many forms, such as a payday loan, a home loan or a car loan.

Loan credit did not always depend on scores

Loan credit, or credit of some sort, has existed for a lot longer than the current system of finance. Often enough, what was needed to secure credit was the promise of a future pay day. For instance, the organization that later became Bank of America gained great success by offering quick and easy loans, secured only by a promise to repay, after the 1906 earthquake and subsequent fire that ravaged San Francisco. Credit cards didn’t exist until the latter half of the 20th century, but people still occasionally needed a loan until payday.

Real loan sharks

Today, people who have stable income and a bank account can get a payday loan if they need one. As long as a person is responsible when he or she borrows money from payday loan lenders, there is no danger. However, prior to the early 20th century, it was a different story. Back then, if people needed money, they had to go to an underground lender, or “salary buyer.” Essentially, a person would borrow a portion of his next paycheck, which had to be turned over to the salary buyer. However, salary buyers could charge whatever they wanted and extract payment any way they wanted.

Supply and demand are real

As result of public outrage at underground lenders like “salary buyers,” states passed small loan laws, which raised usury rates. That way, people could have a supply for demands that were met legally and safely. Banning payday loans will keep real loan sharks in business. You can read more in the Payday Loan Facts and Statistics report on Personal Money Store.